Sep 8, 2023

How Mom and Pop Trucking Companies Are Disrupting the Industry

The trucking industry has long been dominated by large, corporate companies with massive fleets and sophisticated logistics systems. However, in recent years, a new player has emerged: the mom-and-pop trucking company. These small businesses, often family-owned and operated, are disrupting the industry in unexpected ways. Their personalized service, nimble operations, and commitment to customer satisfaction are attracting the attention of shippers and brokers alike.

This blog post will explore the rise of mom-and-pop trucking companies and the impact they are having on the industry. We will examine the unique advantages these companies bring to the table, such as their ability to provide customized solutions for their customers, their flexibility in adapting to changing market conditions, and their intimate knowledge of the local logistics landscape. We will also discuss the challenges facing these smaller operations, including regulatory hurdles, rising fuel costs, and competition from larger firms.

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Mom and Pop Trucking Companies are Thriving

The trucking industry is known for its highly decentralized structure, making it one of the most fragmented industries globally. Contrary to popular belief, deregulation in 1980 did not lead to massive consolidation as expected. Instead, there has been a consistent increase in the number of individual trucking fleets over the years. A chart depicting the growth trend from 2008 till date is available for reference.

Several surprising factors contribute to this phenomenon, and they warrant further exploration.

The effects of the removal of government controls on the trucking sector

Prior to the deregulation of the trucking and railroad industries, the Interstate Commerce Commission (ICC) set fixed rates for trucking services. In 1978, President Jimmy Carter deregulated the airline industry and subsequently deregulated the trucking and railroad industries in 1980. The deregulation led to a significant transformation in the transportation sector, resulting in consolidation in the airline and railroad industries and a proliferation of new trucking fleets.

However, the deregulation also led to the bankruptcy of many long-established trucking companies. Under the ICC, starting a new trucking company was a complex process. Expanding existing trucking companies often required seeking ICC approval for the acquisition of another company to gain new routes. In addition, trucking companies were only permitted to service specific route pairs and transport certain types of goods prior to deregulation.

The trucking industry was significantly more unionized in the past, with the Teamsters boasting over 2 million unionized long-haul drivers in the mid-1970s. However, with deregulation came the ability for trucking companies to operate more freely, setting their own prices and choosing their own routes. This led to many unionized companies filing for bankruptcy, while nonunionized carriers were able to thrive and compete successfully. In the end, deregulation shifted the industry towards a more agile and competitive landscape, with nonunionized companies leading the way.

The Higher Cost Structure 

The union carriers faced considerable challenges adapting to the changing marketplace due to their higher cost structure, leading to decreased flexibility and capability. Consequently, numerous unionized carriers were forced to declare bankruptcy over the course of several years. As a result, nonunionized trucking companies emerged as significant players in the market, often exhibiting rapid growth and favorable economic prospects.

Yellow Corp's recent bankruptcy illustrates the challenges faced by unionized less-than-truckload (LTL) carriers with deep-seated financial issues that trace back to the pre-deregulation era.

The effects of the removal of government regulations on the railway sector

The deregulation of the railroad industry resulted in a challenging period due to the strict requirements set by the ICC and competition from long-haul trucking firms. However, the industry underwent a significant transformation with a series of consolidations, leading to the reduction of major Class I railroads to seven, now six after Canadian Pacific's acquisition of Kansas City Southern in 2021.

The removal of ICC regulations allowed Class I railroads to introduce efficiencies and technological advancements, but this has not translated into an increase in overall carloads. Instead, a shift towards profit-driven management strategies has led to a decline in rail service, negatively impacting shippers over the past decade.

In the wake of trucking deregulation, the transportation industry has seen a shift in the cost-effectiveness of rail versus trucking for moving freight. While rail used to be significantly cheaper, this is no longer the case. However, there is a notable advantage in terms of timely delivery when using trucks over rail. Loads transported by truck are far less likely to experience delays, which can sometimes span days or even weeks when using rail.

For smaller mom-and-pop carriers, this is particularly advantageous, as they can provide ultra-low freight rates that are competitive in the marketplace.

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The advent of containerized shipping has revolutionized the way that goods are transported across the globe

The steel container revolutionized global trade by simplifying, lowering costs, and accelerating the transportation of goods. This advancement enabled Americans to consume more products, while also leading to increased freight volume for truckers to transport.

The initial stages of intermodal transportation emerged in the late 1940s when Eastern railroads adopted the practice of piggybacking - securing truck trailers to railroad flatcars for rail transportation. However, this early form of intermodal was not fully integrated until many decades later due to various challenges such as the limited double tracking, narrow tunnels, and low bridges along old rail corridors in the East, as well as the uncertainty of its long-term profitability for the railroads.

The containerization revolution was spearheaded by Malcom McLean in the early 1950s. He drew inspiration from the successful use of containers by the U.S. armed forces during World War II and initiated the transportation of truck trailers using converted tankers to ports along the Eastern Seaboard and Gulf of Mexico. McLean and his team went on to improve upon the containers used during the war and constructed the first container ships.

Prior to the 1950s, goods transported via water were generally shipped loose or packaged in small containers, a process known as break-bulk shipping. However, with the introduction of steel shipping containers, loading, unloading, and transportation became faster and more efficient, reducing costs and revolutionizing global trade. Thanks to McLean's innovations, intermodal shipping became the method of choice for ocean transport by the mid-to-late 1960s.

The burgeoning growth of China had a disproportionately large effect on the American trucking sector

In late 2001, China was granted membership into the World Trade Organization after 15 long years of negotiations. This momentous occasion marked a significant shift in the global economic landscape, as it allowed China to export an unprecedented volume of goods into the United States.

As a member of the WTO, China was granted unrestricted access to U.S. markets, which provided a lucrative opportunity for the country to increase its export revenue. However, China also enjoyed several unfair advantages that it used to its benefit. For instance, its labor force was significantly cheaper than that of the U.S., which allowed for lower production costs and, in turn, lower prices for consumers.

Furthermore, China's environmental and human rights regulations were less stringent than those of the U.S., giving them an advantage in terms of production speed and cost. These factors all contributed to the influx of Chinese-manufactured goods into the U.S. market, which had a significant impact on the American economy.

China's industrialization was fueled by not just state policy but also ample raw materials, which contributed to the country's rapid development. Moreover, the Chinese government's shrewd policies of currency manipulation and access to cheap capital, along with large-scale infrastructure programs, propelled the nation's industrial growth. Interestingly, China's membership in the World Trade Organization (WTO) had the unintended effect of significantly reducing cross-border commerce under the North American Free Trade Agreement (NAFTA).

As a result of the surge in online shopping and the influx of imported goods, trucking companies of all scales have seen a marked uptick in their freight loads. In fact, over the past twenty years, the personal consumption expenditure on durable goods has skyrocketed, as per federal data. This has created a greater demand for the transportation of goods, offering ample opportunities for trucking businesses to capitalize on.

The augmentation of multimodal transportation in the United States has been on the rise

During the 1950s and 1960s, intermodal rail transportation was a relatively minor part of the long-haul freight industry. However, there were two significant developments that changed this trend. Firstly, political instability and the industrialization of China in the early 1970s led to a surge in oil prices.

Later on, China's manufacturing industry rapidly expanded, exporting cheap goods that were transported via increasingly larger container ships to US West Coast ports. This led to a rise in the use of intermodal rail transportation to transport these goods inland. Large retailers capitalized on the opportunity, importing goods from China and offering low prices to US consumers.

The West Coast is a hub for off-loading containers from ships, which are then strategically placed onto rail chassis for efficient transport across the country. From there, the containers are trucked to various warehouses and distribution centers. This intermodal system has proven to be not only cost-effective but also highly efficient in comparison to other forms of transportation.

Due to the growing demand for imports, intermodal rail has become a popular choice for transportation. Additionally, the railroads have found intermodal carriage to be a profitable revenue stream. Annually, millions of intermodal containers are moved through this integrated system of transportation.

The effectiveness of intermodal transportation stems from its ability to seamlessly integrate different modes of transport

As the distance that containerized cargo must travel increases, the economics of intermodal rail become more favorable. Shipping freight by sea is generally slower than transporting it over land, leading importers to often choose West Coast ports as their entry point, even if their final destination is in the Midwest or on the East Coast.

In terms of population density, the United States can be viewed as two distinct regions: the West Coast and the area east of Interstate 35. The Rocky Mountains and desert regions are sparsely populated, with a few notable exceptions such as Las Vegas, Denver, Salt Lake City, Phoenix, Albuquerque, and El Paso. Despite their scenic beauty, these areas lack the concentration of people that make them attractive destinations for commerce and industry.

The increase in the number of containers being transported across the country has posed a significant challenge for long-haul truckload largest carriers, who have struggled to maintain their profit margins due to the high volume of containers being transported.

As a result, intermodal rail has become a more favorable option for transporting imported containers to the East Coast. Given the long distances between West Coast ports and the Midwest and East, intermodal rail has proven to be a cost-effective solution, resulting in significant cost savings. Despite the perceived inefficiency of rail transportation, it has been found to be a much cheaper option than road transportation, with intermodal rail being particularly fuel-efficient, using only a fraction of the fuel required by trucks.

Truckload carriers have found a way to mitigate their incremental fuel costs by passing them onto shippers through fuel surcharges. These surcharges are typically based on a rate of $1.20 per gallon for diesel, and any additional diesel cost above this amount is the responsibility of the shipper. Interestingly, railroads also utilize fuel surcharges, but at a lesser rate than those of truckload carriers. As fuel costs rise, shippers often opt to transport their freight via rail, as it can be a more economical solution.

The growth of containerized shipping, particularly with Chinese exports, along with the surge in fuel costs, has led to the increased use of intermodal rail transportation. This mode of transportation has seen advancements in infrastructure, such as improved trackage and an increase in double tracking, resulting in the double-stacking of intermodal containers across much of the nation.

The reason why the intermodal system in the United States works so well is due to the efficiency and effectiveness of each

The rise of brokerages is becoming increasingly prevalent in the current market landscape

The trucking industry underwent significant changes in the 2010s, with one noteworthy transformation being the expansion of trucking brokerage. Previously considered a small-scale industry, trucking brokerage saw a significant surge in growth during this time period.

Prior to this, trucking brokerage was often viewed as a last resort for shippers and carriers, with brokerages typically tasked with handling less desirable freight. However, by 2018, trucking brokerages represented almost 20% of all truckload freight business, a substantial increase from less than 6% in 2000.

Amid the COVID pandemic, this trend accelerated further, with some estimates suggesting that brokerages accounted for as much as 30% of truckload freight during the peak of the crisis. These developments highlight the evolving nature of the trucking industry and the crucial role that brokerage now plays in facilitating the movement of goods across the country.

The early 2000s saw an increasing trend of brokerages investing in cutting-edge technology and sales teams, resulting in superior customer service and timely delivery compared to larger enterprise carriers. This prompted several shippers to identify brokerages as their primary providers, sparking a shift towards tendering high-paying, driver-friendly freight to brokers. In recent times, brokers have found themselves partnering with small carriers more frequently, granting them access to lucrative freight without the need for a sales team or top-tier technology.

It is expected that the industry will still be predominantly composed of small trucking fleets as Logistics Analysts say after Competitive Advantage Research on Logistics Market

Over the last half-century, the deregulation of the freight industry and shifts in its landscape have led to the disappearance of many entry barriers. As a result, small carriers and freight brokerages have experienced substantial growth. This trend is expected to continue in the future as more logistics firms emerge due to this lessen barriers to entry.

To further illustrate this trend, you may check out this chart. It displays the number of trucks for various industry cohorts. The white line represents the total number of tractors among fleets consisting of one to six trucks, while the purple line represents fleets of seven to 11 trucks. Fleets with 12 to 19 trucks are represented by the yellow line, while those with 20 to 100 trucks are represented by the blue line. The green line displays the total number of tractors among fleets consisting of 101 to 999 trucks, and the orange line represents fleets with 1,000 trucks or more.

A freight analyst has conducted extensive research, engaged in discussions with fleet owners and brokerages of varying sizes, and closely monitored industry news, consumer habits, industrial production, and events to make a prediction about the future of truckload carriers. Based on these insights, it is predicted that the industry will not experience increased consolidation.

Rather, the focus will shift towards small carriers or independent drivers who will work closely with freight brokers to achieve dominance in the trucking market in North America. This indicates that the future of trucking lies in the hands of small carriers, signaling a potential shift in the industry's landscape.

If you want to stay updated with a wide range of trends, actionable insights, and innovative solutions in the trucking, freight, and logistics industry, stay connected to us.

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